U.S.

Planning for retirement in your 20s

When you're young and thinking ahead to retirement, decision-making is like growing a tree or building a bridge. Decisions you make now will have a direct impact on your financial well-being several years down the road. While each decade of your career is important for your retirement, your 20s present the greatest number of opportunities.

Here is an example to put things into perspective: If you put $4,000 a year -- or about 11.5 percent of a gross income of $35,000 -- into your retirement account at 22, you will have over $1 million by your early 60s, assuming a return on investment of 8 percent. Start saving for retirement 10 years later? You would have to more than double your annual contribution to reach the same dollar amount. So your 20s are really about taking advantage of the opportunities that are presented to you.

Here are some key steps to making great retirement decisions in your 20s:

Most importantly, make your financial health -- and financial future -- a priority. You have a lot of living ahead of you, so prepare for it. You survived college on ramen and with roommates, so what's a couple more years of living within your means to build a sound financial foundation? If you resist the urge to spend your paycheck on eating out or having your own apartment immediately, you can make a lot of progress in your 20s, both in terms of saving and addressing outstanding issues such as student loans.

Speaking of building foundations, before saving for retirement you should build an rainy day fund. I highly recommend tucking away four to six months' worth of expenses. You never know what is going to come up -- you could be laid off, you may have to make an unexpected move, or your car could break down. If you have some money set aside, you won't have to live and die by the dreaded credit card.

Tip number three: Make sure you have health coverage. You are only one accident or illness away from financial disaster if you don't have health insurance. I know you feel invincible in your 20s, but without coverage, you could rack up tens of thousands of dollars in medical expenses. Also, if you don't have insurance now, it will cost you money more immediately. Under the Affordable Care Act, you will be fined for not having health insurance -- up to $695 or 1 percent of your income in 2016.

After you have taken care of the big three in your 20s, you can focus on your retirement funds, and be aggressive. Max out your 401K at least to your employer match. Aim to put aside 10 percent to 15 percent of your gross pay -- that is, your salary before taxes. You should throw in any tax refunds, birthday checks from Grandma or other lump sum monetary gains into your account. This will help you reach your goal and give you a little more flexibility. And take some risk in these funds -- you should have at least 90 percent of your money in stock mutual funds.

Finally, address your outstanding debts in a sensible order. Have private student loans? Credit card debts? Pay those down as quickly as possible, after focusing on your employer-backed retirement funds. Government student loans and other low-interest debt should not be the focus at this point.

View all articles by Mellody Hobson on CBS MoneyWatch»Mellody Hobson is President of Ariel Investments, a Chicago-based money management firm that serves individual investors and retirement plans through its no-load mutual funds and separate accounts. Additionally, she is a regular financial contributor and analyst for CBS News and CBSNews.com.